The Importance of Finances
for Home Sellers
Selling Your Home Might Not Be Worth It If You End Up Homeless
Before you hire a moving company or plan your front door color, make sure you have enough equity. The first thing you should do is ask yourself two simple questions: Do I have enough equity in my home to support the idea of selling it and moving elsewhere? Is everything in order with my finances?
Selling costs
In order to calculate your mortgage payment, you must first determine how much you owe your lender. Skip directly to the Preparing phase if the answer is zero or very little. Every month, your lender should send you a statement stating how much you owe. Find out how much you owe by contacting your lender.
Your loan balance calculation must include any second mortgages, home equity loans, or credit lines you have. As well, you will need to factor in any prepayment penalties on your primary or secondary mortgage loans (check your loan documentation for details).
In order to accurately gauge your home-selling financial position, you will need to conduct your own comparative market analysis. Hiring an appraiser will help you determine how much your home is worth. The $300 investment may well be worth it at this point.
You can calculate your gross equity once you know how much your home is worth and subtract the amount you owe from it. You should be aware that gross equity is different from net equity. You can calculate net equity by subtracting the costs of selling your home from the market value of your home. Gross equity is the difference between your home’s market value and how much you owe to the lender.
A comparison of gross equity and net equity
Net equity can be calculated by subtracting closing costs from gross equity and dividing the result by the number of closing costs you anticipate incurring. Costs of closing might include (but are not limited to):
- Commissions paid to agents
6% of the sale price for full-service agents
The commission charged by a discount agent ranges from 1% to 3% of the sale price
“By owner,” offering buyer’s agent commissions of 2% – 3%
”By owner,” no agents, no commissions owed.
- Appraisal
- Home inspection
- Staging your home
- Repairs/touch-ups
- Paying for buyer’s points or closing costs, as negotiated
- Other negotiable concessions to the buyer
- Municipal/state transfer taxes
- Real estate legal fees
- Title insurance
- Moving
Take the example of a home worth $280,000 and a loan balance of $205,000. You have approximately $75,000 in gross equity. A 6 percent agent’s commission can add up to almost $17,000, which would result in net equity of $45,000 if you estimate your closing costs at $30,000. You retain the cash if you sell by owner (or approximately half if you list with the MLS and pay a buyer’s agent).
Next, figure out how much cash you’ll need to buy your next home, or how much cash you’d like to withdraw from the transaction to pay off debts or other expenses, such as college tuition if you’re not buying your next home. Net equity will be used to fund these funds.
Net equity – what does it mean?
In determining whether you are in a good financial position to sell, you can consider the following markers:
- The majority of advisors would agree that you are in good financial shape to sell your home if you have net equity of at least 20%.
- Ten to twenty percent and things are tighter, but if you get an offer near your asking price, things will work out if you aren’t looking to get a lot of cash.
It will be difficult to sell your home if you have equity under 10 percent, unless you plan not to buy your next home and don’t need to take much out of the deal. You may be able to sell your home on your own in tight financial circumstances by saving agent commissions. Calculate a sales price that you absolutely cannot go below if you move forward.
It will be difficult to complete a sale if you have negative equity – commonly referred to as being “underwater” – unless you have some independent way to make up the difference. You may consider borrowing from other sources if you need to sell for financial reasons. More information is available at FHFA.gov or the Consumer Financial Protection Bureau.
Buy and sell at the Same Time?
Find out what the current mortgage interest rates are in your area – current rates and trends so you can prepare for a home loan application. You can start by visiting our Mortgage Center powered by lendingtree.com to get an idea of local rates and national trends. Talk to your local banks’ mortgage lenders about their current rates and their perspective on the market. For mortgage rate information, you may also want to consult your local newspaper. You should also examine your credit report so you can determine if your credit score is good enough to qualify for a home loan or whether you need to raise it.